Annual Report 2017 Pre-approved by the resolution of MTS PJSC Board of Directors May 28, 2018, Minutes No. ____ Approved by Annual General Meeting of Shareholders of MTS PJSC June 28, 2018, Minutes No. ____ Today we live in the world where products and services that were above a beyond only yesterday are now reality. It is a world of augmented and refined reality where there is no borderline between the ordinary and the virtual and deprived of physical realization. This is the dimension in which MTS is a link between needs and innovative solutions. MTS. Improved reality 1 Welcome to 2017 MTS PJSC Annual Report This is 2017 MTS PJSC Annual Report, which we have Annual Report Structure been preparing for you since 2001. The report comprises four main sections: Purpose of the 2017 Annual Report • About the Company; • Management Report; To represent MTS as an innovative company being in a • Corporate Governance; constant development and offering its customers the most advanced solutions and services that make every- • Sustainable Development. day life more convenient, eventful and brighter. Strategically oriented report Annual Report Preparation Standards • The report is focused at strategic vision of the The report has been prepared in accordance with the Company management, comparison of results and requirements of the legislation of the Russian Federa- key aspects of MTS business during the year to the tion and regulators’ requirements applicable to MTS, strategy; and also in accordance with the Russian and interna- tional standards and practices in the field of public • The report has increased volume and quality of annual reporting. forecast/expert information on macroeconomics, regional markets of telecommunications providers. Where to Find More Info Online version (interactive) IPad App https://moskva.mts.ru/about/investoram-i-akcioner- https://itunes.apple.com/ru/app/ am/korporativnoe-upravlenie/raskritie-informacii/ godovaa-otcetnost-gruppy-mts/id919440557?mt=8 godovaya-otchetnost The Annual Report is also published as PDF and printed in Russian and English. 2 About MTS About MTS Dear friends, We are working in the telecommunications industry, useful and interesting things with the help of a mobile which is strategic for the country development and phone. We consider this only the beginning and are indispensable for resolving a wide range of everyday planning for further progress! and business tasks of any person. All kinds of services rendered by MTS, such as mobile and fixed-line teleph- Our goal is to make sure that MTS customers could use ony, Internet access, have long been firmly established the opportunities offered by modern mobile technolo- in the “consumer basket” of every Russian. gy in full, while not limiting themselves in communica- tion. A highly professional MTS team implements new Our work is aimed not only at rendering high-quality, ideas and projects daily so that our customers in any beneficial and convenient services to the customers, region and of any income could use communication as well as ensuring high service level, but we are also services as much as they want and like not bearing any constantly looking ahead, improving our offer and unforeseen costs. launching advanced services. Today our subscribers can quickly find the right information in the Internet, go Join MTS, stay with us for many years and you will shopping, pay for travels, buy tickets for concerts and always be one step ahead, as we know, understand and movies, manage their finances and make many other appreciate you striving to anticipate your expectations! Yours faithfully, Alexey Kornya, MTS President 1 In this Annual Report, the terms “MTS”, the “Company”, and the “Group” shall refer to the group of companies consisting of MTS PJSC and its subsidiaries; MTS PJSC shall mean Mobile TeleSystems Public Joint Stock Company. The indicators contained in this Annual Report are as of December 31, 2017, unless other periods or dates are expressly indicated. 3 Mission We believe that life is a space of opportunity for all. Since birth, every person has the potential to take advantage of this opportunity for his or her own good and that of the whole world. We believe that every human being is a potential hero who can accept any challenge and follow his or her dreams. The world is changeable and every day springs new surprises, thus, following these circumstances, MTS gives every person assurance helping to fulfil their potential and move towards new prospects. MTS is a source of opportunities. You know you can! 4 Contents Contents About the Company Sustainable development MTS Group Today 8 Our Approach to Sustainable Development/ Social Responsibility 206 Digital business areas 10 Our Employees 210 Main Outcomes for 2017 12 Social investments 222 2017 Highlights 14 Information Protection and Security 232 Message of the Board of Directors Chairman 16 Management Report Additional Information History of the Company 238 Message of the President 20 Report on fulfilment of the principles MTS Business Model: the Source of Your and recommendations of the Corporate Dividends 22 Governance Code 240 Our Markets 24 Company’s position in respect to Looking into the Future 28 environmental protection 266 MTS Innovation Center 36 Key features of staff and indicators of human resources system 271 Our Strategy 38 Glossary 274 Business Overview 47 Contacts and Additional Information Financial Overview 58 about the Company 276 Risk Management 74 Compliance and Culture of Good Faith Behavior 80 Corporate Governance Report of the Board of Directors 92 Interaction with Shareholders and Investors 96 Our achievements 102 MTS Group Governance System 104 Management of subsidiaries of MTS Group: 182 Capital and securities 194 Corporate Governance Development 200 5 About the Company MTS Group Today More than 213 thousand km of fiber-optic lines MTS LTE coverage in Russia — around 60% of the populated territory 213 thousand 60% More than 70 thousand employees 70 thousand 8 MTS Group Today 36% MTS share in the mass market of broadband access to Internet 38% and paid TV — 36% and 38% accordingly 9 5.6 million New WEB-platform for MTS thousand online shop, more than 9 million on-line orders per year More than 5.6 thousand MTS outlets and around 100 offices of MTS Bank 9 Digital business areas Big Data 1.6 billion RUB total effect FinTech Smart-analytics for business optimization 22 billion RUB MTS Money service turnover Sistema Capital – retail investments IoT 42% SIM-cards in Russia1 Platform for industrial IoT Cloud 8 data centers in Russia Apps Big Data-as-a-Service 12.1 million My MTS users более 20 приложений МТС 1 Source: AC&M Satellite TV MTS 350 thousand users More than 78 million subscribers 10 Penetration of smart- phones in MTS network – 65% Strengthening of leadership through acquisitions, partnerships and development of own innovative products Digital business areas Entertainment 25% of theater and concert tickets market in Russia Ticketland.ru and Ponominalu.ru E-Learning MTS English & В2В-training Entrance into market of corporate Cloud and remote education 8 data centers in Russia Big Data-as-a-Service E-Health Telehealthcare Joint project with MEDSI Online cash register LiteBox Cloud product for retail Cybersport 22 billion RUB – Gambit Esports MTS Money service turnover Products for gamers and marketing activities System integration 5.6 billion RUB 11 Main Outcomes for 2017 • MTS completed 2017 with strong financial results and has secured a footing in the new markets. 2017 has become the year of transformation for MTS. The Company has been working successfully on digitization strategy implementation and expanded business in the new areas. • In July, MTS purchased 100% shares of the regional communications provider Cellular Communication of Bashkortostan OJSC (CCB). Purchase of the asset made it possible for the company to expand its presence in the Republic of Bashkortostan and to obtain an additional frequency resource, including bandwidths with frequency of 15 MHz in the range of 2100 MHz and 4.4 MHz in the range of 450 MHz. • In September, MTS entered the market of investment services, having taken part in the capital of Sistema Capital MC LLC, one of the largest management companies in Russia by volume of collective investments. Under the signed agreements, MTS purchased 30% of the authorized capital of Sistema Capital MC. • In October, the company acquired 50.82% in the authorized capital of Cloud Retail LLC (LiteBox trademark), the Russian developer of software for retail. The transaction takes MTS to the market of cloud cash registers as a supplier of ready solutions for cash services to business customers. • In December, MTS entered the market of cybersport based on one of leading cybersport clubs in the world — Gambit Esports. The teams within Gambit Esports have many times been champions of the world and Europe, and also silver and bronze prize winners of the largest international competitions. MTS strategy in the cybersport market will both combine marketing activities and development of products for gamers. 12 Main Outcomes for 2017 Financial Indicators Operational indicators Consolidated income MTS online sales increased by 19.4% for the year and reached 442.9 billion RUB 5.2 billion RUB OIBDA MTS platform was launched for industrial IoT: MTS share in the market of SIM-cards for IoT in Russia amounted to 179.8 billion RUB 42% OIBDA profitability Сumulative effect from the use of Big data 40.6% 1.6 billion RUB Total net profit Кevenue from system integration 56.0 billion RUB 5.6 billion RUB Net income margin Dividend payments in 2017 in the amount of 26.0 rubles per share + yield of 10.9 rubles 12.7% per share as a part of redemption program 13 2017 Highlights February 13, 2017 MTS launched a new service MTS Money Wallet, which makes it possible to get quick and convenient access per single click to financial services of MTS.